We
recommended the Commissioner, TE/GE Division, prepare and submit for issuance
public guidance to reemphasize the IRSí position on political activity and
private benefit related to exempt organizations.

Managementís
Response:†
TE/GE Division management agreed with our recommendation and will develop and
submit to TE/GE Division Counsel and the Department of the Treasury the
recommended public guidance.† Managementís complete response to the draft
report is included as Appendix VI.

Please
contact me at (202) 622-6510 if you have questions or Daniel R. Devlin,
Assistant Inspector General for Audit (Headquarters Operations and Exempt
Organizations Programs), at (202) 622-8500.

†

Table of Contents

Background

***(b)(3):
26 U.S.C. 6103***

The
Independent Review Process Was Envisioned As Early As 1999, and ***(b)(3): 26
U.S.C. 6103***Cases Were Referred for Review Prior to Its Elimination

***(b)(3):
26 U.S.C. 6103***

Recommendation
1:

Appendix
I Ė Detailed Objective, Scope, and Methodology

Appendix
II Ė Major Contributors to This Report

Appendix
III Ė Report Distribution List

Appendix
IV Ė Timeline of Key Events

Appendix
V Ė ***(b)(3): 26 U.S.C. 6103, (b)(7)(C)***

Appendix
VI Ė Managementís Response to the Draft Report

†

Background

The
Tax Exempt and Government Entities (TE/GE) Divisionís Independent Review
Process (IRP) was created to provide TE/GE Division management with an internal
mechanism to ensure consistency, fairness, and accuracy related to case processing.†
The IRP was originally envisioned to provide a structured and fair review of
sensitive cases handled by the TE/GE Division (e.g., Exempt Organizations,
Employee Plans, Indian Tribal Governments, Tax Exempt Bonds, etc.).† Within the
TE/GE Division, the Office of the Senior Technical Advisor (STA) was
responsible for providing an independent technical review of the cases referred
to the IRP.†

***(b)(3):
26 U.S.C. 6103***

This
audit was conducted in accordance with Government Auditing Standards during the
period June through November 2003.† The audit was performed by interviewing
TE/GE Division management at their Division Headquarters in Washington, D.C.,
and the Baltimore, Maryland office, and by reviewing documentation related to
the creation and subsequent termination of the IRP and the cases referred to
the IRP at the time of our review. ***(b)(3): 26 U.S.C. 6103***

Detailed
information on our audit objective, scope, and methodology is presented in
Appendix I.† Major contributors to the report are listed in Appendix II.†

***(b)(3):
26 U.S.C. 6103***

***(b)(3):
26 U.S.C. 6103***

***(b)(3):
26 U.S.C. 6103***

***(b)(3):
26 U.S.C. 6103***

***(b)(3):
26 U.S.C. 6103***

***(b)(3):
26 U.S.C. 6103***

***(b)(3):
26 U.S.C. 6103***

***(b)(3):
26 U.S.C. 6103***

According
to TE/GE Division Counsel management, the current process is that EO issues
(including revocation letters) are assigned to field attorneys with experience
in those issues and that sensitive or complex issues are to be discussed and coordinated
with TE/GE Division Counsel experts in the Headquarters Office.† Any
disagreements should be elevated to the Assistant Chief Counsel or Division
Counsel level, as necessary.† Although this process is not a formal procedure,
the TE/GE Division Counsel stated this process is reinforced through monthly
teleconferences among Division Counsel EO-specialist attorneys and managers in
the field and in the Headquarters Office (referred to collectively as ďthe EO
practice groupĒ), during which employees compare information and discuss
technical issues. These teleconferences provide more consistency in working
cases and establish the working relationships that will enable better
coordination on individual cases.† Based on the Division Counsel reorganization
and the current practice of assigning work to specialists who coordinate
sensitive issues with the Headquarters Office, we are not making a
recommendation to address this issue.

***(b)(3):
26 U.S.C. 6103, (b)(7)(C)***

For
any case referred to the IRP, IRS guidelines state the STA will have access to
all files, documents, and other materials relating to the case.† Generally, the
STA may consult with any TE/GE Division employees regarding the development of
the case or matter and, if circumstances warrant, receive submissions and/or
hold conferences with third parties, including entities, organizations, or
individuals that may be affected by the ultimate disposition of the case.†
Further, the STA may consult with the TE/GE Division/Associate Chief Counsel regarding
Counselís position in the case or matter or initiate Counselís consideration of
the case or matter if Counsel has not been previously consulted.

***(b)(3):
26 U.S.C. 6103, (b)(7)(C)***

***(b)(3):
26 U.S.C. 6103, (b)(7)(C)***

***(b)(3):
26 U.S.C. 6103, (b)(7)(C)***

***(b)(3):
26 U.S.C. 6103, (b)(7)(C)***

***(b)(3):
26 U.S.C. 6103***

***(b)(3):
26 U.S.C. 6103***

***(b)(3):
26 U.S.C. 6103***

The
Independent Review Process Was Envisioned As Early As 1999 and ***(b)(3): 26
U.S.C. 6103***Cases Were Referred to Review Prior to Its Elimination

***(b)(3):
26 U.S.C. 6103***

TE/GE
Division management followed established procedures when referring cases to the
IRP.

***(b)(3):
26 U.S.C. 6103***

As
early as February 1999, the creation of the IRP was proposed as part of the
original plan to create the TE/GE Operating Division.† The stand-up[7] of the TE/GE
Operating Division was completed in December 1999, but the IRP did not become
operational until March 2001 when the position of the STA was filled. †According
to the Commissioner, TE/GE Division, the position of the STA was not filled
until then due to higher priorities related to the stand-up of the TE/GE
Operating Division.

***(b)(3):
26 U.S.C. 6103***

***(b)(3):
26 U.S.C. 6103***seemed to indicate the general public did not know the IRP
existed or what its role was.† As stated earlier, the TE/GE Division did not
envision the IRP to be available to the public; it was for TE/GE Division
managementís use in sensitive cases handled by the TE/GE Division.† With the
exception of the press release issued March 14, 2001, announcing the selection
of the STA, the TE/GE Division has not performed any outreach efforts to inform
its customers of the IRP.† ***(b)(3): 26 U.S.C. 6103*** These factors may have
contributed to the publicís lack of awareness of this process.

TE/GE
Division procedures state that cases are to be referred to the IRP usually after
being elevated to the applicable TE/GE Division Director and approved by the
TE/GE Commissioner or Deputy Commissioner.† In unusual circumstances, the
Commissioner, TE/GE Division, may refer a case to the IRP without a request
from a Director.†

We
determined TE/GE Division management followed established procedures when
referring cases to the IRP. Since its creation, ***(b)(3): 26 U.S.C. 6103***
cases have been referred to the IRP.† ***(b)(3): 26 U.S.C. 6103*** Based upon
contacts with each of the four TE/GE Division Directors (EP, EO, Government
Entities, and Customer Account Services), no other cases have been recommended
to the Commissioner, TE/GE Division, for referral to the IRP.

TE/GE
Division management decided to eliminate the IRP.

During
the fieldwork phase of our review, the Commissioner, TE/GE Division, informed
senior TIGTA management of the IRSí decision to eliminate the IRP within the
TE/GE Division. This decision was effective August 25, 2003.†

TE/GE
Division management informed us that the IRP was never intended to be an
appellate process for TE/GE Division customers.† Instead, it was intended to
provide TE/GE Division management with an internal mechanism to ensure
consistency, fairness, and accuracy related to case processing.† In addition,
TE/GE Division management stated the IRP was intended to enhance the publicís
perception of the fairness and impartiality of the TE/GE Divisionís processes.†
***(b)(3): 26 U.S.C. 6103*** the Commissioner, TE/GE Division, and the Office
of the IRS Commissioner decided to terminate the IRP.

***(b)(3):
26 U.S.C. 6103***

***(b)(3):
26 U.S.C. 6103***

***(b)(3):
26 U.S.C. 6103***

***(b)(3):
26 U.S.C. 6103, (b)(7)(C)***

***(b)(3):
26 U.S.C. 6103***Considering the current environment and potentially incorrect
assumptions about exempt organizations and political activity, there is a need
for clarification from the IRS on this matter.

Recommendation

1.The
Commissioner, TE/GE Division, should prepare and submit for issuance public
guidance to reemphasize the IRSí position on political activity and private
benefit related to I.R.C. ß 501(c)(3) organizations.†

Managementís
Response:†
TE/GE Division management agreed to develop and submit to TE/GE Division
Counsel and the Department of the Treasury the recommended public guidance.†
TE/GE Division management noted that the issue is difficult and development of
appropriate and effective guidance in this area is elusive.† Any guidance
submitted will require the independent concurrence of TE/GE Division Counsel and
the Department of the Treasury.

†

Appendix I

†

†

Detailed Objective, Scope, and
Methodology

The
overall objective of this review was to evaluate the Tax Exempt and Government
Entities (TE/GE) Divisionís Independent Review Process (IRP) ***(b)(3): 26 U.S.C.
6103*** We performed the following tests:

I.
†Evaluated the use of the IRP within the TE/GE Division.

A.Interviewed
TE/GE Division personnel and obtained documentation to determine when and why
the IRP was established and subsequently terminated.

B.Obtained
documentation detailing the procedures for the IRP and any actions taken to
inform customers of the process.

C.Interviewed the
four TE/GE Division Directors (Employee Plans, Exempt Organizations, Customer
Account Services, and Government Entities) to determine whether they had
requested any cases for referral to the IRP that were denied.

II.
†Determined whether the TE/GE Division followed established procedures when
referring the ***(b)(3): 26 U.S.C. 6103***cases to the IRP.